A Gold Standard Manifesto

A great quote from William Osler typifies the evolution of our current monetary system. He said: “The philosophies of one age have become the absurdities of the next, and the foolishness of yesterday has become the wisdom of tomorrow.”

Decades and centuries ago, no one would have done without a hard-money standard. The founders wrote in the Constitution that only gold and silver could be legal tender. Today our fiat monetary system is firmly in place. Although it has wrecked a once healthy economy, you’d be considered a pagan in mainstream academia if you wanted to abolish it in favor of the gold standard.

As our monetary system has evolved, it has become more and more ill. During the first major crisis with hard money, the government devalued paper money and raised the value of gold. However, Roosevelt essentially suspended convertibility for citizens. International convertibility and the standard remained until the next crisis. Then the government could no longer afford the gold standard so it de-linked the dollar permanently.

Note that there are three types of currency: commodity currency, representative currency, and fiat currency. The Western world was quite prosperous under representative currency (1800-1971). Can the same be said of fiat currency?

The Industrial Revolution marks a major turning point in human history; almost every aspect of daily life was eventually influenced in some way. Most notably, average income and population began to exhibit unprecedented sustained growth. In the two centuries following 1800, the world's average per capita income increased over 10-fold, while the world's population increased over six-fold. In the words of Nobel Prize winning Robert E. Lucas, Jr., "For the first time in history, the living standards of the masses of ordinary people have begun to undergo sustained growth. ... Nothing remotely like this economic behavior has happened before."

Today we see the exact opposite. The living standards of the masses in the US are falling and have been since 1970. The cost of living has risen faster than wages, despite whatever the CPI says. One in seven Americans lives in poverty while 42 million receive food stamps. That is up 58% in just the last three years.

Meanwhile, Paul Krugman thinks we are seeing a steady slide toward lower inflation. Mr. Krugman, why don’t you do some first-hand research? Why don’t you talk to those folks who are struggling? Do you have any idea of the cost of food? General bills? Education? Health care? Are you paying attention to commodity prices?

Deflation is not the problem. Thankfully, Paul Krugman, Brad DeLong, and Ben Bernanke weren’t around in the early 19th century as they may have impeded the Industrial Revolution because they were worried about “falling prices.”

In the end it doesn’t matter what we think because a new monetary system and return to some form of the Gold Standard is a certainty. Policy makers have no other options this time. Back in the 1930s, they raised the price of gold and devalued the dollar. In the 1970s, they ended convertibility entirely. Today we cannot raise interest rates sufficiently high to end this mess. There is too much debt in the system and it would bankrupt governments.

This speaks to why gold is rising. Low interest rates and quantitative easing help the case, but sovereign debt default by Western nations is a certainty. Remember, fiat currencies are tied to government finances. It may take five years or 10, but it is a certainty. There is no way these economics can grow their way out of the debt bubble.

Hence, the logical ending point of this bull market is a new currency regime, and gold will play a large role in that. Not by coincidence, the new monetary system with gold as part of it will go a long way toward fixing America’s problems.

First, let me discuss why the end of the gold standard was an impetus to many of our problems. The economic effects are obvious. It set in motion constant inflation, which has continuously undermined the middle class and the poor. It created inflation, which forced corporations to seek cheaper labor alternatives offshore. It removed controls and restrictions on the government, which could now easily buy votes.

As a result of the government losing its discipline, the population followed. Individuals went from earning and saving to consuming, going into debt and accumulating too many possessions. Not surprisingly, people lost their work ethic and became lazy. Attitudes, morals and values have changed -- and for the worse, in many cases.

The new monetary regime will help to reverse these trends. It will impose tight controls and restrictions on the government. Massive deficits will become a thing of the past. The populace is already getting the message and won’t have trouble following suit. Debt and consumption will be shunned. Initially, a lower standard of living will force families closer together and better values will emerge.

It may be five or 10 years before we see this new monetary and currency system. In the meantime, consider where things are going and stake your claim. Gold hit $1,400, but that is barely more than five times its low. Major bull markets rise 20, 30, even 50-fold. Months ago, my firm repeatedly mentioned that less than 1% of global managed assets were invested in precious metals. It doesn’t take an expert to see where this is going.